The Value of Information Sharing in a Two-Level Supply Chain by Lee, So and Tang Emrah Zarifoğlu

Sharing Demand Information Bullwhip effect (Lee et al) Demand information sharing, summary of POS, between Wall Mart and Johnson and Johnson, Lever Brothers, (Gill and Abend) VMI, CRP at Campbell Soup and Barilla (Clark), (Hammond)

Intent of the Paper Model of two-stage supply chain –retailer and manufacturer Benefit of information sharing to the chain Very significant benefit to the manufacturer alone numerical example –to show manufacturer’s great savings by High demand correlation High demand variance within each period Long lead times Especially useful in the high-tech industry

Quantifying the Value of Information Sharing Unsynchronized review period of manufacturer with retailer causes order review time order replenishment decision by use of retailer’s inventory level (Bourland et al.) Manufacturer’s benefit from inventory information sharing of retailers using batch order policy (Cachon and Fisher) Manufacturer has limite capacity, etc... (Gavirneni et al.)

Aim of the Paper This paper examines the impact of the auto correlation coefficient and the leadtime on the benefit of information sharing in a two-stage supply chain

Model Simple two-level supply chain –one manufacturer and one retailer Autocorrelated AR(1) demand process D t = d + ρD t-1 + ε t D t : demand at retailer at period t ρ: correlation coefficient ε t : iid ~ N(0, σ 2 )

Model (Cont’d) Periodic review –replenishment from retailer to manufacturer each period Backlog allowed Order: Y t  realization at t+l+1 Resupplying allowed, guaranteed order by manufacturer Order-up-to policy by manufacturer and retailer

Retailer’s Ordering: Order at period t: Y t = D t + (S t – S t-1 ) Total demand over lead time:

Retailer’s Ordering (Cont’d) Conditional expectation and conditional variance of total demand over lead time:

Retailer’s Ordering (Cont’d) Order-up-to level: Ordering quantity: Y t ≥ 0 for ρ > 0

Manufacturer’s Ordering Aware of retailer’s demand process Order at t  realization at t + L + 1 Recursive equations for retailer’s order:

Manufacturer’s Ordering (Cont’d) Total shipment quantity over manufacturer’s lead time for any given value of retailer’s order at period t:

Manufacturer’s Ordering (Cont’d) No Information Sharing: Total shipment quantity over manufacturer’s lead time : F t ~ N(M t, Vσ 2 ) Optimal order-up-to level:

Manufacturer’s Ordering (Cont’d) Information Sharing: Total shipment quantity over manufacturer’s lead time : F` t ~ N(M` t, V`σ 2 ) Optimal order-up-to level:

Benefits of Information Sharing Retailer’s cost not affected Benefit is high if Demand autocorrelation is high Demand variability is high

Inventory Reduction Approximation for average (on-hand) inventory: Approximation for average (on-hand) inventory depending on parameters:

Inventory Reduction (Cont’d) Reduction in inventory: Percentage inventory reduction: Increasing in autocorrelation coefficient Increasing in coefficient of variation of underlying demand Increasing by K (shortage cost P is high relative to holding cost H)

Expected Cost Reduction Using a loss function and convexity Expected cost with information sharing is less than expected cost with no information sharing

Impact of Demand Process Characteristics Numerical example to analyze goodness of approximation of average inventory Compared to a simulation

Impact of Demand Process Characteristics (Cont’d) Simulated results very close to approximation (within 5%) Reduction in inventory by information sharing ρ larger  reduction in inventory larger by information sharing Complex demand is suitable for these results (high-tech industry, grocery industry)

Impact of Demand Process Characteristics (Cont’d) Give incentive to retailer to share its data Financial scheme to reduce retailer’s variable cost Price reduction Better return policy Better payment terms etc... Operational scheme to reduce retailer’s overhead, processing and inventory costs VMI Reduce retailer’s leadtime

Impact of Lead Time Affects manufacturer’s logistic, inventory holding and shortage costs Benefit for both Reduce both inventory levels l larger  reduction in manufacturing inventory due to information sharing is larger Numerical example

Impact of Lead Time (Cont’d) Decrease in retailer’s cost sharply Decrease in manufacturer’s cost slightly Information sharing offers additional cost saving to manufacturer not much variable wrt l No direct benefit to retailer by information sharing Implementation of information sharing and leadtime reduction provides benefit for both

Impact of Lead Time (Cont’d) L larger  cost savings to the manufacturer larger (by information sharing)

Future Research Directions Focus on multiple retailers instead of a single retailer Comparison of benefits of information sharing with VMI programs